OCC to Move Forward with Considering Fintech Charter ApplicationsOrrick, Herrington and Sutcliffe LLP

Howard Altarescu, Jeremy Kudon, Bob Loeb, Chris Cariello

These presentation materials are for informationalpurposes only. Neither these materials nor Orrick,Herrington & Sutcliffe LLP are rendering legal orother professional advice or opinions on specificfacts or matters. Orrick assumes no liability inconnection with the use of this publication.

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Outline

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Potential Challenges to Authority of the OCC to Grant FinTechCharters

Chris Cariello, Supreme Court and Appellate Litigation

OCC Fintech Charter Announcement and Comments

Howard Altarescu, Finance

State Regulatory Considerations and Objections

Jeremy Kudon, Public Policy

Why Consider a Charter: National Bank Interest Rate Preemption –Madden vs. Midland, True Lender Concerns.

Bob Loeb, Supreme Court and Appellate Litigation

OCC Fintech Charter Announcement and CommentsHoward Altarescu, Finance

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December 2, 2016: OCC Announces Decision to Consider Fintech Charter Applications

4May 2017

• Policy Reasons- Public interest

- Economic growth / future of banking

- Regulatory oversight

• Certain Requirements- Business plan and operating agreement

- Corporate and governance structure

- Capital and liquidity

- Compliance risk management

- Financial inclusion (CRA equivalent requirements)

- Recovery and exit strategies / resolution plan

- Bank Secrecy Act and anti-money laundering laws

- Prohibitions on unfair or deceptive acts or practices

• Practical Considerations- National bank status and attributes

- Cost savings . . . or . . . regulatory

cost burden

- Comparison to existing regulation

- Cost of capital, etc.

- Modified capital and other requirements

- Competitors

- Operating considerations

- Possible failures / consolidations /

acquisitions

- Bank Secrecy Act / AML

- State laws and regulations

- Challenges to OCC authority and delay

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Comments Requested by OCC on Following Topics

5May 2017

Public policy benefits / risks

Applicable capital and liquidity requirements

Financial inclusion commitment

Protections for individuals / small business borrowers

Business model vs. regulatory expectations

Safety and soundness / public interest

Level playing field

Different approaches for particular products or services

Regulatory coordination

Concentration risk

Comments were due by January 15, 2017

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Comment Letters

6May 2017

FintechCompanies

GenerallySupport

• Growth of financial innovations,fintech ecosystem and global finance

• Increases financial inclusion and promotes access to banking

• Compliance with state regulatory scheme is cumbersome

• Consumer and business credit markets should not be partitioned by 50 state borders

• OCC should tailor application requirements on case-by-case basis

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Comment Letters

7May 2017

Banking Associations

State Regulators and

Government Entities

Consumer/Small Business Advocacy

Groups and Community

Organizations

GenerallyOppose

orExpress

Concerns

• OCC should proceed with caution / provide clearer, comprehensive framework

• Statutory authority? Congress’s territory

• Lack of consistent regulation / impairs dual banking system

• Fintech reaps benefits of a bank charter without having bank qualities

• Jeopardizes state consumer protection laws / fosters irresponsible lending

State Regulatory Considerations and ObjectionsJeremy Kudon, Public Policy

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Strong Headwinds Ahead . . .

9May 2017

• The question is no longer WHEN

OCC will grant its first charter, it’s IF.

• Democrats and Republicans don’t

agree on much, but both are opposed

to OCC’s federal fintech charter:

- Senate Democrats

- House Republicans

- Deep Blue States

(e.g., New York and California)

- Blood Red States

(e.g., Florida and Iowa)

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“The creation of an OCC national charter will stifle

rather than encourage innovation; it would be an

avenue for large, dominant firms to control the

development of technology solutions in the financial

services industry, thereby harming existing

community banks and small businesses seeking to

serve local communities.”

Maria Vullo, Superintendent of New York State DFS

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“With state regulators already licensing fintech

firms and ably overseeing them, the OCC has

offered a solution to a problem that does not exist.

Florida’s financial services industry has

experienced exponential growth under a practical

state regulatory system. One size does not fit all.

Fintech regulation is best left to the states.”

Drew J Breakspear, Commissioner of

Florida’s Office of Financial Regulation

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So Why Are States Opposed?

12May 2017

• Fintech is not so very different from

the banks that states have

historically licensed and regulated.

• Federal charter = consumer

protection vacuum.

• Preempt state usury laws and allow

payday lenders to enter states that

have long banned them.

• This will hurt, not help innovation.

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So What Have States Done?

13May 2017

• Many commentators thought

regulators would respond to OCC’s

fintech charter announcement with

a wave of proscriptive fintech

legislation and/or regulations.

• Instead, they have sat on the

sidelines. With only a few weeks

remaining in most state legislative

sessions, only New York has

considered fintech legislation.

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Crystal Ball Time

14May 2017

So what’s next?

• Delay, delay, delay: Lawsuit provides President Trump and Congress with

enough time to nominate and confirm a new Comptroller of the Currency

and jettison the current iteration of the federal fintech charter.

• More of the same: No one receives a fintech charter and states continue

to regulate and/or pass comprehensive fintech legislation.

• The OCC strikes back: OCC shrugs off lawsuit and Congressional

opposition and grants charters in June.

• Never going to happen: Congress passes its own special purpose charter

for fintech companies.

Why Consider a Charter: National Bank Interest Rate Preemption – Madden vs. Midland, True Lender ConcernsBob Loeb, Supreme Court and Appellate Litigation

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Interest Rate Portability

16May 2017

• The National Bank Act (12 U.S.C. § 85) and the Depository Institution

Deregulation and Monetary Control Act (12 U.S.C. § 1831d) authorize

national & state-chartered banks to make loans throughout the country

at the “interest rates” permitted in their home states. Conflicting state

statutes are preempted.

• The “preemptive reach” of §§ 85 and 1831d is not limited “only to a

national [or state-chartered] bank itself.” Watters v. Wachovia Bank,

N.A., 550 U.S. 1, 18 (2007). State law will be preempted in any instance

in which it “significantly impair[s]” a bank’s exercise of its powers. Id.

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Madden v. Midland Funding (2d Cir.)

17May 2017

• Madden, a New York resident, opened a credit card account with

the Bank of America (national bank). Bank of America transferred the

account to FIA Card Services (affiliated National Bank in Delaware).

• Annual interest rate set in Delaware was 27%, which was

permissible under the NBA but which exceeded the general usury

rate in New York.

• When Madden failed to make timely payments, FIA charged off

the debt and sold the plaintiff’s debt to defendant, Midland Funding

(third-party debt purchaser that is NOT a national bank).

• Midland sought to collect the debt in NY at the Delaware interest rate.

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Madden (cont.)

18May 2017

• Madden brought a class action, alleging

violation of NY’s usury law.

• District Court holds NY law preempted by

NBA

• Second Circuit – No preemption of state

usury laws. Preemption does not extend to

“third-party debt collectors” – that act

neither on behalf of or as an agent of the

bank.

- Here, no retained ownership interest by the

bank in the defaulted loans

- Application of the state law “would not

significantly interfere with any national bank’s

ability to exercise its powers under the NBA.”

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Supreme Court Denies Review

19May 2017

• Cert. Petition

• Court calls for views of the United States

• US and OCC Brief: Madden is wrong, but no

conflict among the circuits

- The power to issue loans at rate is the power to sell

it at that rate. This reflects the long-established

“valid when made” principle, which the Supreme

Court has called the “cardinal[] rule in the doctrine of

usury.” Nichols v. Fearson, 32 U.S. (7 Pet.) 103,

109 (1833). Under that principle, a loan that is

lawful when it is made cannot later become usurious

through assignment. Section 85 (and by extension

1831d) embody the “valid-when-made” principle.

• Court denies review

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Distinguishing Madden

20May 2017

• Madden arose in the defaulted debt context. The sale of defaulted debt

is attenuated from the core banking activity of extending credit at an

applicable rate and collecting or assigning performing debt. It follows

that application of state usury law would work a less significant impairment

on the bank’s powers.

• Madden depended on the complete absence of any retained interest on

the part of the national bank. Where a bank retains at least a partial

interest in repayment, there is a stronger case for preemption of state law

and enforcement of the rate of the issuing bank.

• Madden also depended on the complete absence of any ongoing lender-

creditor relationship between the bank and the borrower. The existence

of an ongoing relationship would strengthen the case for preemption.

Krispin v. May Dept. Stores Co., 218 F.3d 919 (8th Cir. 2000).

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True Lender Challenges

21May 2017

• Some courts have held that loans sold or assigned to a non-bank are

entitled to preemption only if the originating bank is the “true lender.”

• Generally, courts have resolved that issue by asking whether the bank set

terms and policies and retained an interest in the loans.

• In the specific context of unscrupulous lenders making high interest loans

through sham partnerships with banks, some courts have asked whether

the bank retains the “predominant economic interest” in the loans—a more

demanding standard.

• If the “predominant economic interest” standard extended to marketplace

platforms, it would raise preemption issues.

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Colorado Litigation

22May 2017

The Colorado AG has attacked the

marketplace platform model based on

Madden and True Lender arguments.

The Banks are fighting back.

• Meade v. Marlette Funding

• Meade v. Avant

• Cross River Bank v. Meade

• WebBank v. Meade

Potential (And Actual) Challenges to Authority of the OCC to Grant FinTechChartersChris Cariello, Supreme Court and Appellate Litigation

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Conference of State Bank Supervisors v. OCC (D.D.C.)

24May 2017

- CSBS –

“The nationwide

organization of state

banking regulators”

- Competitors?

- Individual States?

Who?

- Form: Action in district

court to enjoin issuance

of special purpose

charter or charters

- Function: Challenge

to 12 C.F.R. §

5.20(e)(1)(i) and the

Comptroller’s two-step

What/How?

- 1-2 years…

- …if nothing pulls

the rug out first.

When?

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The “business of banking”

25May 2017

• If the Comptroller decides an entity is “lawfully entitled to commence

the business of banking” it may issue a charter to conduct such

business. 12 U.S.C. § 27(a).

• 12 C.F.R. § 5.20(e)(1)(i): “at least one of … three core banking

functions: receiving deposits; paying checks; or lending money”….

• Chevron U.S.A. v. NRDC (1984)

- Step 0: Would Congress have delegated this issue? Is it one of deep

“economic and political significance”? See Cuomo v. Clearing House Ass’n.

- Step 1: Did Congress define the business of banking? No.

- Step 2: Is OCC’s interpretation reasonable?

Statutory text | Statutory framework | Case law | History

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No Nonbank Banks and Other Arguments

26May 2017

• Nonbank banks

- Banks must take deposits.

- IBAA v. Conover, the BHCA, and historical treatment

- Getting past ambiguous?

- When Congress wants special-purpose charters, it says so.

- National State Bank of Elizabeth and trust banks

- Credit card banks

• Process/Rulemaking Arguments

• Policy Arguments

- Interference with State authority, regulatory uncertainty,

consumer protection, harm to competition and innovation

- Will courts care?